Aug 06, 2013, 04.22 PM | Source: CNBC-TV18

Don't fall for large consumer names; IT safe: Envision

Despite poor macro data, the market has managed to stay in the 5,500-6,200 due to support from few consumers and IT stocks, but it may not be able to hold these levels for long, he cautions.

Service sector, which contributes 60 percent to Indian economy has turned sluggish, which indicates that growth environment has deteriorated significantly, says Nilesh Shah, MD & CEO, Envision Capital.

“It was more like the last nail in the coffin in the sense the services sector was so far was growing at above GDP,,” he told CNBC-TV18 in an interview. The HSBC Services Purchasing Managers' Index (PMI) contracted for the first time in 20 months to 47.9 points in July from 51.7 points in the previous month. CNBC-TV18’s managing editor Udayan Mukherjee also feels that poor service sector growth data is an alarming bell and could lead to GDP downgrade going ahead.

Despite poor macro data, the market has managed to stay in the 5,500-6,200 due to support from few consumers and IT stocks, but it may not be able to hold these levels for long, he cautions. IT sector is likely to extend its outperformance, but valuations in largecap consumer stocks are in a bubble zone, he added.

The banking sector is poised for more downside and private sector lenders will lead this underperformance, he said continuing his bearish tone.

Given the bleak prospects of significant revival in the macros, one should avoid rate sensitive and economy sensitive sectors for the next few quarters. Bet on select pharmaceutical and some tier two consumer stocks which have managed to sustain 10-15 percent growth even in this environment. 

Also read: Buy ITC & HPCL, stay away from infra space: Angel Broking

Below is the edited transcript Nilesh Shah’s interview with CNBC-TV18

Q: What did you make of the big disappointment that we saw in the services sector data yesterday and how are you positioned in terms of growth going ahead?

A: It was more like the last nail in the coffin in the sense that the services sector has been the strongest pillar of the Indian economy. It has been a sector which has been growing at gross domestic product (GDP) beating rates and it has formed a large component of India’s GDP. Even now the growth in the services sector has turned sluggish indicates that in general the growth environment has deteriorated significantly. I do not think that is essentially a good thing to happen in this environment.

Q: Last many quarters we have at least floated around, thanks to eight or ten stocks in 5,500-6,200 range. Do you think it will hold out in the face of such poor data?

A: It is going to become very challenging. Those eight or ten stocks have been largely from the consumer sector and to some extent the technology sector. I believe that the technology sector is set to outperform, it has been delivering continued outperformance over the last few months and that is because of a revival in the US economy and strength of the dollar versus the rupee.

However, in the consumer segment, especially the largecap consumer names, valuations have been on significantly higher side, more like a bubble territory. So, I do not think that the largecap consumer names will be able to sustain these kinds of valuations. We are going to now see even further increased polarisation versus what we have seen in recent times. I do not think that is essentially a good signal for the market.

Q: How are you approaching it because it has been a long wait; this year has not passed very well, looks like things are not improving in a hurry. How do you approach investing right now in these difficult times?

A: The strategy to continue to avoid essentially rate sensitive, economy sensitive sectors. Unfortunately it’s a very large component of the investable universe and that is a segment which will continue to get punished and underperform till we do not see any major revival in the economy. Revival is hard to see at this stage.

The safest sectors within the economy have been the consumer side and again there valuation is a challenge. Therefore what is going to be very interesting to see is to continue to look at technology stocks, select pharmaceutical stocks and some tier two consumer names, which even in this environment are sustaining 10-15 percent growth. They are probably around 20 price to earning (PE) multiple. This maybe probably the right strategy to adopt for  next few months or next few quarters.

The downside to the banking sector still is very evident given that the asset quality is continuing to deteriorate. Some of the banks which have managed to the asset quality well will have pressure on margins because of the latest developments in the money market. Particularly private sector banks which have been doing well, will continue to underperform going forward and not deliver the kind of returns that they have delivered over the last two-three years. It is a very narrow set of sectors which will continue to deliver outperformance over the next few quarters.

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